Originally published in the May 6 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
A few months after being surprised by the Federal Revenue Department’s revised interpretation of contract manufacturing activities under the presumed income tax calculation regime (lucro presumido), Brazil’s contract manufacturers may now have some relief.
Interpretative Declaratory Act (ADI) 26/08, published in Brazil’s official gazette on April 28, revokes ADI 20/07, which had introduced a differentiation in the tax treatment applicable to contract manufacturers under the lucro presumido regime with effect from January 1.
ADI 20/07 changed the contract manufacturing tax treatment by establishing a limit up to which contract manufacturing would still be considered an industrial activity eligible for the presumed tax basis of 8 percent.
It said that if the costs of the materials provided by the client to the contractor accounted for a greater portion of the total value of the manufactured product than any materials and manufacturing services provided by the contractor, the manufacturing activity carried out by the contractor would be considered as a service activity rather than an industrial activity. As a result, the contract manufacturer would be subject to the presumed tax basis of 32 percent, as opposed to 8 percent, significantly increasing the income tax and social contribution on net income (CSL) payments of those falling within ADI 20/07’s definition.
ADI 26/08 establishes a new definition to characterize contract manufacturing as an industrial activity subject to the presumed tax basis of 8 percent. It not only completely disregards the ratio of material provided by clients and the contractor in the total value of the manufactured product, it also adopts the definition of manufacturing used for the levy of the federal excise tax (IPI) on manufactured products.
ADI 26/08 expressly adopts the concept of manufacturing described in article 4 of the IPI Code, which includes any operation that modifies the nature, functioning, finishing, presentation, or purpose of a given product, or improves it for consumption.
Taxpayers falling within the situation described in former ADI 20/07 will no longer be subject to additional income tax or CSL. If any additional income tax or CSL has been paid based on ADI 20/07, taxpayers should consult with their tax advisers to evaluate refund alternatives.
David Roberto R. Soares da Silva